Readers’ forum: Partial exemption credit note challenge

One of my clients is partially exempt as a financial services business. In October 2021 the business paid £150 000 plus VAT to an outside contractor to improve and develop its website. It treated the expense as residual input tax and claimed 60% of the VAT with the standard method on its December 2021 return which was reduced to 50% with the annual adjustment calculation carried out to 31 March 2022 ie £15 000 was claimed.

After a lengthy dispute about the quality of work carried out the contractor has now issued a credit note for £100 000 plus VAT which will be included on my client’s next VAT return. However my client’s business model has changed so that 80% of his work is now VATable and only 20% is exempt. This percentage will apply on both a quarterly and annual basis. The problem...